Charitable trust aggressive asset allocation and impact on personal investments

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bogivan
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Charitable trust aggressive asset allocation and impact on personal investments

Post by bogivan » Sun Oct 08, 2017 10:41 am

I am in the middle of setting up a Charitable Remainder Unitrust (CRUT). I am naming myself as trustee to make sure fees aren't a drag. I will be paid 5% of the assets every year until my death (which should be many years as I am in my 30s) and then the charity gets whatever remains.

I am creating an investment plan for the trust which I would love some input on. As trustee deciding on asset allocation, I have a split obligation both to myself and the charity. I am thinking that a very aggressive, unchanging allocation is probably appropriate to ensure growth for the charity and also hopefully ensure that inflation doesn't eat away too much of the value of the yearly payouts: perhaps 80-90% stock, 10-20% bond. International allocation of stocks: 40%. Obviously it would be invested in well-diversified, low-cost funds. I would not have a problem sleeping at night with this kind of allocation - I am not a risk-adverse investor anyway, but it makes things even easier when putting myself in the mindset that it is now the charity's money.

I've been looking at early retirement AA research in particular to decide on the allocation because it most closely matches the CRUT scenario (withdrawing over a very long period of time) and these seem to point to very high stock allocations necessary over long time periods.

Specific questions I have:

1. Is this kind of 90/10 aggressive allocation really appropriate for a CRUT?

2. Assuming the CRUT is invested aggressively, does it make sense to modify my own personal investment allocation to be more conservative or should I treat them as completely separate?

3. Is there anything I might be missing (allocation-wise, legally, etc)?

EHEngineer
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by EHEngineer » Sun Oct 08, 2017 11:23 am

Interested to know why you would do this. You're creating extra paperwork, extra tax efforts, creating a permanant taxable income stream instead of a managed income stream. And you are in your 30s, with plenty of life uncertainty (kids, wives, family responsibilities, disability, loss of income, and so on) What's wrong with a regular old will until you're older?

ps. welcome to bogleheads!
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Gill
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by Gill » Sun Oct 08, 2017 11:38 am

I'm also curious why you would do this. There is almost no tax advantage to a CRUT for a person in their 30's.
Gill

bogivan
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by bogivan » Sun Oct 08, 2017 1:17 pm

Why would I do this? I know it is probably unusual for someone my age, but I believe it is a perfect fit for the current situation:
  • The investments are low cost basis, so my attempts at diversifying are generating huge 90%+ capital gains (long-term, but any additional diversification at this point is being taxed 33%)
  • The investments are also very volatile, so I want to lock in the gains and diversify before very possible 50%, 70%, or maybe even larger drops in value
  • I have been fortunate enough that the gains are enough to start looking at early retirement, so generating yearly income for myself is what I would want to do anyway - this way the diversified portfolio starts growing at full current value instead of immediately getting cut down one third from taxes
  • The CRUT portfolio grows tax-free - removing some tax drag that could reduce growth in a taxable account (tax is only due on what is paid out to me)
  • When I die, most of my assets would very likely be going to charity anyway - this way the charity should be getting more
  • The charitable deduction, while a small percentage due to my age, is still significant and can help offset capital gains this year from diversifying the investments that aren't being donated to the trust.
  • I like the idea of the irrevocable trust keeping some assets shielded from possible creditors and diversified from a legal entity standpoint
I do realize I am giving up a lot of flexibility and there is a lot of uncertainty when locking up assets in something irrevocable over this kind of period of time, but I believe the benefits will outweigh negatives. It isn't too late to pull out if I completely overlooked something and anyone wants to try talking me out of it, though! :D

bsteiner
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by bsteiner » Sun Oct 08, 2017 2:07 pm

Your analysis is correct. The principal benefit of the charitable remainder trust is the ability to diversify without current capital gains tax. Note that it defers rather than avoids the capital gains tax.

Gill
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by Gill » Sun Oct 08, 2017 3:43 pm

As bsteiner indicates, you are accomplishing diversification but with the trade off that you are limiting yourself to 5% of the principal annually and dealing with a CRUT the rest of your life. Furthermore, it is quite likely that the draw of 5% will erode the principal and significantly reduce your payout over the years.

As for investing this trust, I’ve managed such accounts along with some pretty sophisticated investment people. It is a difficult task to produce 5% a year in addition to administration expenses of the trust. The asset allocation of the CRUT has no bearing on your personal investments. You are basically receiving a variable annuity.
Gill

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Tyler Aspect
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by Tyler Aspect » Sun Oct 08, 2017 4:24 pm

I think I would advise against a charitable remainder trust if you are still young. The better option would be to invest with a mix of tax advantaged accounts (401k), and taxable accounts. Donating some appreciated stocks to a Donor Advised Fund during some of your highest tax years would be the superior move.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

EHEngineer
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by EHEngineer » Tue Oct 10, 2017 9:04 am

bogivan wrote:
Sun Oct 08, 2017 1:17 pm
Why would I do this? I know it is probably unusual for someone my age, but I believe it is a perfect fit for the current situation:
  • The investments are low cost basis, so my attempts at diversifying are generating huge 90%+ capital gains (long-term, but any additional diversification at this point is being taxed 33%)
  • The investments are also very volatile, so I want to lock in the gains and diversify before very possible 50%, 70%, or maybe even larger drops in value
  • I have been fortunate enough that the gains are enough to start looking at early retirement, so generating yearly income for myself is what I would want to do anyway - this way the diversified portfolio starts growing at full current value instead of immediately getting cut down one third from taxes
  • The CRUT portfolio grows tax-free - removing some tax drag that could reduce growth in a taxable account (tax is only due on what is paid out to me)
  • When I die, most of my assets would very likely be going to charity anyway - this way the charity should be getting more
  • The charitable deduction, while a small percentage due to my age, is still significant and can help offset capital gains this year from diversifying the investments that aren't being donated to the trust.
  • I like the idea of the irrevocable trust keeping some assets shielded from possible creditors and diversified from a legal entity standpoint
I do realize I am giving up a lot of flexibility and there is a lot of uncertainty when locking up assets in something irrevocable over this kind of period of time, but I believe the benefits will outweigh negatives. It isn't too late to pull out if I completely overlooked something and anyone wants to try talking me out of it, though! :D
Have you considered a Donor Advised Fund? That would allow immediate diversification, as well as a tax deduction. You could donate over a period of years to accrue the largest benefit. You could donate 80-90% and just pay tax on the rest in order to have some value for yourself.

This is a much much lower effort alternative. I think you are underestimating the cost & burden of dealing with such a trust for decades.

How much money are you considering putting in the trust?
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

bsteiner
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by bsteiner » Tue Oct 10, 2017 9:34 am

EHEngineer wrote:
Tue Oct 10, 2017 9:04 am
...
Have you considered a Donor Advised Fund? That would allow immediate diversification, as well as a tax deduction. You could donate over a period of years to accrue the largest benefit. You could donate 80-90% and just pay tax on the rest in order to have some value for yourself.

This is a much much lower effort alternative. I think you are underestimating the cost & burden of dealing with such a trust for decades.
...
The two are very different. With the charitable remainder trust bogivan is only giving away the remainder interest (worth about 15% of the initial value).

Dealing with the trust shouldn't be a major burden, especially after the first year.

EHEngineer
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by EHEngineer » Tue Oct 10, 2017 9:53 am

bsteiner wrote:
Tue Oct 10, 2017 9:34 am
The two are very different. With the charitable remainder trust bogivan is only giving away the remainder interest (worth about 15% of the initial value).

Dealing with the trust shouldn't be a major burden, especially after the first year.
I had read about and discounted these before, for myself and for the reason I mentioned. Maybe I need to reconsider. Any recommendations about where could I could learn more about?

If I have to do an extra tax return (effort) for $500-$1000/yr (expense) Then my account balance must be > $200k to even consider the CRUT. If I have an account balance of, say $500k, then my income stream is $25k/yr. Income tax cost would likely be $5-$10k/year. This is brutal.

Also, how did you calculate the 15%?
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

bsteiner
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by bsteiner » Tue Oct 10, 2017 10:10 am

EHEngineer wrote:
Tue Oct 10, 2017 9:53 am
bsteiner wrote:
Tue Oct 10, 2017 9:34 am
The two are very different. With the charitable remainder trust bogivan is only giving away the remainder interest (worth about 15% of the initial value).
...
... how did you calculate the 15%?
Based upon current interest rates, at age 35, the remainder interest in a 5% unitrust with quarterly payments beginning 3 months after the inception is 14.346%. The actual value will depend on (i) the original poster's age, (ii) the applicable interest rate at the time the trust is created, (iii) the frequency of the payments, (iv) the time between funding and the first payment, and (iv) the payout rate.

We have software that does this.

EHEngineer
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by EHEngineer » Tue Oct 10, 2017 10:26 am

bsteiner wrote:
Tue Oct 10, 2017 10:10 am
EHEngineer wrote:
Tue Oct 10, 2017 9:53 am
bsteiner wrote:
Tue Oct 10, 2017 9:34 am
The two are very different. With the charitable remainder trust bogivan is only giving away the remainder interest (worth about 15% of the initial value).
...
... how did you calculate the 15%?
Based upon current interest rates, at age 35, the remainder interest in a 5% unitrust with quarterly payments beginning 3 months after the inception is 14.346%. The actual value will depend on (i) the original poster's age, (ii) the applicable interest rate at the time the trust is created, (iii) the frequency of the payments, (iv) the time between funding and the first payment, and (iv) the payout rate.

We have software that does this.
Got it. thank you. 15% would be heavily influenced based on donor's lifespan, for example if OP dies 3 years after trust setup, then the 15% would be ~ 85%. The same tradeoff as a single-life annuity.

I get what you are saying about the 15% as a "partial donation", but if OP continues to be charitable donor (and that seems likely), he will likely make donations that surpass the total value of his CRUT (as would I/will I). And if he dies early, then the bulk of the CRUT will go to charity anyway. Maybe this can be extended with multiple beneficiaries? That would add to the complications due to life uncertainty in one's 30s.

I think I have re-concluded that CRUT isn't worth the effort/cost for me. It's a complication of the simplier solution, ie a split between Donor Advised Fund and selling/paying some tax. Maybe it makes sense to others, just not for me.

I'm still interested to know the approximate value of OPs CRUT.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

bogivan
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by bogivan » Thu Oct 12, 2017 8:21 am

EHEngineer wrote:
Tue Oct 10, 2017 9:04 am
I think you are underestimating the cost & burden of dealing with such a trust for decades
The burden doesn't seem much worse - in many ways much easier - than dealing with small business accounting which I don't have a problem with. At any point I can hand the management to a corporate trustee if I don't want to deal with it.

Costs seem minimal and mostly up-front as long as I work towards handling it myself. After having an accountant assist for the first few years, hopefully I can handle everything and the ongoing costs will be $0.

I realize that burden and costs will have ups and downs with occasional law changes. Since the structure is irrevocable it may be completely possible for me to regret this decision if laws change significantly in a negative way. Given everything I know now, however, it seems like the right choice.
EHEngineer wrote:
Tue Oct 10, 2017 9:04 am
How much money are you considering putting in the trust?
Around 1.5 million - approximately 70% of the appreciated stock.


Thank you everyone for the comments. If anyone has any comments on the original question regarding asset allocation of the trust itself, it would be appreciated.

EHEngineer
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by EHEngineer » Thu Oct 12, 2017 10:03 am

bogivan wrote:
Thu Oct 12, 2017 8:21 am
EHEngineer wrote:
Tue Oct 10, 2017 9:04 am
I think you are underestimating the cost & burden of dealing with such a trust for decades
The burden doesn't seem much worse - in many ways much easier - than dealing with small business accounting which I don't have a problem with. At any point I can hand the management to a corporate trustee if I don't want to deal with it.

Costs seem minimal and mostly up-front as long as I work towards handling it myself. After having an accountant assist for the first few years, hopefully I can handle everything and the ongoing costs will be $0.

I realize that burden and costs will have ups and downs with occasional law changes. Since the structure is irrevocable it may be completely possible for me to regret this decision if laws change significantly in a negative way. Given everything I know now, however, it seems like the right choice.
EHEngineer wrote:
Tue Oct 10, 2017 9:04 am
How much money are you considering putting in the trust?
Around 1.5 million - approximately 70% of the appreciated stock.


Thank you everyone for the comments. If anyone has any comments on the original question regarding asset allocation of the trust itself, it would be appreciated.
You are essentially asking about safe withdrawal rates. lots of stuff to read there, but less so with a fixed percentage of end of year portfolio withdrawal (not fixed percentage of intital portfolio value.).

Have you looked at firecalc.com? You can back test. I played with it a little, and it confirms that with a substantial withdrawal rate like 5% (of each year's portofolio value), you need a lot of stocks to keep it from shrinking over a long period like 60 years. But I don't think firecalc.com includes international.

Wade Pfau used to have a blog post with a bunch of tables showing survival rates for various withdrawal strategies but I can't find it since he moved to "retirementresearcher.com" Anyway, he has written a bunch about withdrawal rates. This thread is what I remember.
viewtopic.php?f=10&t=71850
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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Tyler Aspect
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Re: Charitable trust aggressive asset allocation and impact on personal investments

Post by Tyler Aspect » Thu Oct 12, 2017 12:34 pm

bogivan wrote:
Thu Oct 12, 2017 8:21 am
Thank you everyone for the comments. If anyone has any comments on the original question regarding asset allocation of the trust itself, it would be appreciated.
When you set an aggressive asset allocation for a trust, you are only considering the potential return. Stability of the trust is equally important. Trust funds are usually set up between (60% stock / 40% bond) to (40% stock / 60% bond).
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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